A Guide to Unlocking the Power of Annuities

If you’re concerned that you’re not only going to still be alive after all your saved money has been spent, but that you’re going to still be alive after your mental faculties have seriously declined, this is for you.

We really ought to talk about annuities. And we promise – this is an annuity guide, not a sales pitch.

What’s an annuity?

An annuity is a contract where you pay an insurance company either a lump sum or a periodic premium and the insurance company provides you with an income stream, an annuity, for either a specific timeframe or for life. Annuities, then, are insurance against outliving your savings or your ability to manage your own affairs. U.S. annuity sales increased 22% to $77.5 billion in the second quarter of 2022, according to LIMRA, a financial services trade association.

“Few adults would go without auto, home, life or health insurance,” writes Kiplinger’s Ken Nuss. “But the kind of insurance that protects against the risk of running out of money in old age is still greatly underutilized. It’s called a deferred income annuity or a longevity annuity.”

You’re already familiar with certain types of annuities in principle. Social Security is essentially an annuity; you paid in every month while you were working and, once you hit your retirement date, you get a fixed amount back every month for as long as you live. Old-fashioned, defined-benefit pensions were much the same.

Today, market-sensitive 401(k) and IRA plans predominate, and that makes the steady stream of annuities all the more desirable.

You’ll want to check with your employer to see if it gives you the option of investing in annuities via your 401(k). If allowed by your retirement plan, this investment option might be the way to go for at least a portion of your retirement savings, rather than taking your chances on the open market. If you get exposure to an annuity via your 401(k), then you can be confident that it has been vetted to be in compliance with federal retirement fund guidelines and might also be available for a lower fee than you’d be charged over the counter.

If you decide to realign your retirement plan to include annuity exposure, they typically substitute nicely for the fixed-income assets you own, like bonds. You might want to just swap a portion of your bond portfolio to acquire an annuity.

Yield signs

“Continued equity market declines and rising interest rates drove investors to purchase record-level fixed-rate deferred annuities in the second quarter,” said Todd Giesing, assistant vice president at LIMRA Annuity Research. “Our research shows fixed-rate deferred annuity manufacturers are, on average, offering interest rates more than four times that of a bank CD, which has made these products a tremendous value for investors looking for protection and growth potential.”

For retirement planning, this is especially true of deferred annuities. These types of annuities start paying as of a target date, as opposed to immediate annuities that start paying out as soon as you invest your lump sum.

Deferred annuities payout based on economic factors. If you think interest rates are going down, you might want to invest in fixed-rate annuities. If you expect things to continue as they are now, variable-rate annuities might be better. If you believe the stock market is going to roar back, you can buy annuities that are indexed to the S&P 500 or some other benchmark.

David Rodeck, also at Kiplinger’s, has a great primer on the subject.

There’s a lot to consider with potential annuity benefits. Whether you’re married or single, whether you want the option of taking distributions earlier than originally planned, and whether you want to consider taking a lump-sum payment rather than monthly checks are all factors in selecting annuities.

But none of this is an immutable promise. You need to own your personal finances. Of course, it’s always a good idea to have a financial professional guide you through the inevitable rough times and provide you with solid annuity advice.

Reach out to us today to learn about how we can help.